McKesson Corporation (MCK) on Q2 2021 Results - Earnings Call Transcript
Disclaimer: *NEW* We are providing this transcript version in a raw, machine-assisted format and it is unaudited. Please reference the audio for any questions on the content. A standard transcript will be available later on the site per our normal procedure. Please enjoy this timely version in the interim.: Operator: Welcome to McKesson's Q2 earnings call. I'd like to turn over the call to Miss Holly Weiss, please go ahead. Holly Weiss: Thank you. Well, good morning and welcome, everyone, to McKesson's second quarter fiscal twenty twenty one earnings call today. I'm joined by Brian Tyler, our Chief Executive Officer, and Britt Vitalone alone our Chief Financial Officer. Brian will lead off, followed by Brett, and then we will move to a question and answer session. Today's discussion will include forward looking statements such as forecasts about McKesson's operations and future results. Please refer to the cautionary statements in today's press release and our slide presentation and to the Risk Factor section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward looking statements. During this call, we will discuss non-cash financial measures. Additional information about our non-cash financial measures, including a reconciliation of those measures to gap results, is included in today's press release and presentation slides, which are available on our website at investor McKesson Dotcom. With that, let me turn it over to Brian. Brian Tyler: Thank you, Ali. And good morning, everybody. Thank you for joining us on. In the United States, today is obviously an important day, a day which every citizen who can vote should have the opportunity to exercise their civic right, regardless of who's in the White House. We look forward to working with the administration in the new Congress to ensure a strong and safe economic recovery while keeping the health care supply chain running and continuing to deliver for our customers on the front lines of this pandemic. Today, we reported second quarter total company revenues of sixty point eight dollars billion and adjusted earnings per diluted share of four dollars and eighty cents, both ahead of prior year and our revised expectations we laid out in August. I'd like to thank the people who make up Team McKesson for their resilience, their dedication, their flexibility and ability to manage through change the first half of fiscal twenty twenty one is certainly played out differently than the original expectations we provided to you in May. You'll recall that based on the positive signs of recovery at the end of our first quarter, we raised our guidance for fiscal twenty twenty one. In our second quarter, we again saw volumes increase compared to the low points early in the first quarter. While patient mobility and prescription volume showed improvement and stability, the recovery continues to be non-linear is the word we've adopted. And our second quarter results are a good example of the unpredictability of the pace and the trajectory of the recovery. In addition, the pandemic has caused customer needs to evolve, and we pivoted quickly to meet the incremental demands and needs. Britt Vitalone: Thank you, Brian. And good morning, everyone. We're pleased with our adjusted operating profit and adjusted earnings per share results in the second quarter. We delivered growth over our prior results and exceeded the expectations that we laid out on our Q1 earnings call. Despite an extremely volatile and challenging macro environment, we couldn't be more proud of the way our teams have executed and continue to deliver and innovate. Through this unprecedented period of uncertainty. We delivered solid core performance across our businesses in the quarter, including new product volumes and elevated demand in our medical surgical segment. This new volume includes an increase in the sales of covid-19 tests and increased fines of personal protective equipment as we continue to respond to the needs of our customers during the pandemic. We also recognize gains in equity investments within our McKesson Ventures portfolio. And I'll provide further detail on this. As a reminder, in our first quarter, we were impacted across our businesses by economic lockdowns and social distancing, which led to decreased health care utilization across geographies that we operate in. However, in June, we began to see an acceleration of demand as volumes recovered earlier than we originally anticipated. As I mentioned, during our Q1 earnings call, we expected a non-linear recovery from the effects of the pandemic over the remainder of our fiscal year, and we saw the non-linear course of the recovery continue to play out in our second quarter results. Prescription volumes recovered from their lowest levels earlier in our fiscal year, although not back to prickley levels. The primary care patient visits continue to improve at a rate faster than we had anticipated. As Brian mentioned, in the second quarter, we observed increased fines for code related products, particularly covid tests, as we stocked up to meet demands for additional testing and supplies, including personal protective equipment. We continue to respond to the dynamic and fluid environment, and we're pleased with our execution throughout the first half of our fiscal year. This morning, I'll provide commentary on our second quarter results and an update on the key assumptions that support our outlook for the remainder of fiscal 2021, and my comments today will relate to our new segment structure. Let's turn now to our second quarter results, a summary of which, including updated guidance, can be found in the investor section of our website. And I'll start by pointing out two items that impacted our gap only results in the quarter. First, within U.S. pharmaceutical, we recorded a pretax charge of 50 million dollars for an estimated liability related to the New York State Opioid Stewardship Act, or OSHA. The charges, the estimated share of the New York Osei surcharge for calendar years, 2017 and 2018. As a reminder, we recorded in accrual in the first and second quarter of fiscal 2019 for the estimated portion of the annual assessment under the USA. USA was later ruled unconstitutional and the accrual was reversed in the third quarter of our fiscal 2019. That ruling was reversed in September of Twenty twenty and therefore we took a charge in our fiscal second quarter. Secondly, within our international segment, we recorded a goodwill impairment charge of 69 million dollars, which was associated with the segment realignment. Now to a discussion of our adjusted earnings results for the second quarter, starting with our consolidated results on slide four. Consolidated revenues of sixty point eight dollars billion were up six percent compared to the prior year, primarily due to market growth in higher volumes from retail national account customers in our U.S. pharmaceutical segment. Adjusted gross profit increased four percent year over year, driven by growth in our medical surgical segment, which saw increased demand for covid-19 tests in higher volumes from customers in the US pharmaceutical segment. Adjusted operating expenses increased five percent year over year, led by increased technology spend, which was partially offset by a reduction in operating expenses due to the impact of covid-19. Adjusted operating profit was nine hundred and fifty three dollars million for the quarter, an increase of three percent compared to the prior year. When excluding the thirty nine dollars million contributed by Change health care in the prior year, which was previously recorded in other adjusted operating profit, grew eight percent, which was ahead of our expectations. Interest expense was 50 million dollars in the quarter decline of 22 percent compared to the prior year due to lower commercial paper balances, and we now expect interest expense in fiscal 2001 to be between 220 and 240 million dollars. Our adjusted tax rate was seven point two percent for the quarter in the range that we indicated on our first quarter earnings call in August, during the quarter we realized discrete tax benefits of approximately one hundred and twenty nine million dollars. And we continue to assume a full year adjusted tax rate of approximately 18 to 20 percent. Second quarter adjusted earnings per diluted share was four dollars and eighty cents, which was up 33 percent in the quarter compared to the prior year, driven by a lower share count, a lower tax rate and operating performance led by the growth in the Medical Surgical Solutions segment. These items were partially offset by the lapping of the prior year contribution from the company's investment in health care. Porter adjusted earnings per diluted share also includes net pretax gains of approximately forty nine dollars million, or 22 cents per diluted share associated with McKesson Ventures equity investments. Wrapping up our consolidated results, second quarter diluted weighted average share for 163 million, a decrease of 11 percent year over year, which was driven by the successful exit of our investment in health care, lowering our shares outstanding by approximately fifteen point four million shares and due to prior year share repurchases. Next review, our second quarter segment results, which can be found in slide five through nine. As a reminder, affected with the second quarter of fiscal 2021, the customer revised its segment reporting structure, we now report results in four reportable segments, which include U.S. pharmaceutical, international medical surgical solutions and Prescription Technology Solutions or our expertize. And I'll start with U.S. pharmaceutical, where revenues were forty eight point one dollars billion, up five percent, driven by market growth and higher retail national account volumes partially offset by branded generic conversions. In our specialty businesses, particularly in our U.S. and college network, we saw patient visits approach pre with levels. Adjusted operating profit increased three percent to 658 million, driven by growth in specialty, partially offset by higher operating expenses in support of our strategic growth initiatives. In the segment, adjusted operating margin for the second quarter was one hundred and thirty seven basis points, which was a decrease of three basis points. Next on to international, where revenues were nine point five dollars billion, an increase of two percent year over year on an adjusted basis, revenues decreased one percent, primarily driven by lower volumes in the Canadian pharmaceutical distribution business, which is largely due to the exit of an unprofitable customer at the beginning of the fiscal year. This was partially offset by higher volumes in the European pharmaceutical distribution and retail pharmacy businesses. Adjusted operating profit increased 20 percent year over year to one hundred and sixty million dollars on an adjusted basis, adjusted operating profit increased 19 percent to one hundred and fifteen dollars million, driven by lower European operating expenses, including continued cost reduction initiatives and cost mitigation efforts in response to covid-19. The segment adjusted operating margin for the second quarter was 122 basis points, which was an increase of 18 basis points. As Brian mentioned in his remarks yesterday, we announced the completed contribution of our German wholesale business to a newly formed joint venture with Walgreens Boots Alliance, WBA now holds a 70 percent controlling equity interest in the JV and McKesson holds the remaining 30 percent. Going forward, McKesson will no longer consolidate the operating results of its German wholesale business, will recognize the 30 percent share of the JARVIE earnings and losses in other income within our international segment. Moving on to medical surgical solutions, we continue to see trends improved during the quarter. According to an October Raccuglia report, primary care patient visits reached approximately 91 percent of the pre covid baseline. Our medical surgical business continues to play a vital role in the covid-19 pandemic, ramping up to meet customer demand with our delivery of covid-19 tests and personal protective equipment. Revenues were two point five dollars billion in the quarter of twenty three percent, driven by higher volumes of covid-19 test in personal protective equipment in both our primary care and extended care businesses. Adjusted operating profit increased twenty seven percent to 210 million dollars, driven by demand for covid-19 tests, early flu season volumes in contributions from the extended care business. In the segment, adjusted operating margin was 829 basis points, an increase of twenty two basis points. Next, prescription technology solutions revenues were six hundred and sixty eight million dollars, an increase of seven percent, driven by new brand support programs which were partially offset by the impact of lower prescription volume trends. Adjusted operating profit decreased 10 percent to 104 million dollars, which was driven by higher operating expense investment to support the company's biopharma service growth initiative. For the past several quarters, we've outlined our strategic investment into the products and services within R&D, resulting in higher operating expenses to support future growth. We expect to continue to invest in the expansion of our technology offerings for our retail and biopharma customers to support the future operating profit growth of this segment. The segment, adjusted operating margin for the second quarter was fifteen point fifty seven percent, down from eighteen point thirty seven percent in the prior year. And moving on to corporate cash recorded one hundred and million dollars in adjusted corporate expenses in the quarter, an increase of two percent year over year, primarily driven by increased technology costs and lower interest income. This increase was largely offset by net gains of approximately forty nine dollars million on equity investments within our McKesson Ventures portfolio and McKesson Ventures portfolio holds equity investments in several growth stage, digital health and services companies, and we're pleased with the portfolio results and the inset insights obtained. Well, mark to market valuations in this quarter resulted in gains from three of our investments, the impacts were consolidated. Financials can be influenced by the performance of each individual investment quarter to quarter. As a result, the crescent investments may result in gains or losses, the timing and magnitude of which can vary for each investment. It's difficult to predict when gains or losses on our venture portfolio companies may occur. And therefore our practice has been and will continue to not include ventures portfolio activity in our guidance. And finally, we reported opioid related litigation expenses of 41 million dollars in the quarter and for fiscal Twenty twenty one, we continue to anticipate that opioid related legal costs will be approximately one hundred and sixty dollars million. Turning now to cash, which can be found on slide 11. We ended the quarter with a cash balance of three point one dollars billion for the first half of fiscal 2001. We had negative free cash flow, 306 million dollars per working capital metrics and resulting free cash flow vary from quarter to quarter and are impacted by timing, including the day of the week that marks the close of a quarter. Looking at the cash flow dynamics, we saw higher levels of inventory this quarter, primarily resulting from the increased quantities of covid testing and personal protective equipment and our participation in operation warp speed as we prepare for continued larger quantities of personal protective equipment and operation warp speed activity, we may experience additional working capital volatility. Earlier today, we made two hundred and sixty five million dollars of capital expenditures led by internal investments in areas such as technology and continued investment in our strategic growth initiatives. We also made investments in data and analytics capabilities across the enterprise. For the first six months of the fiscal year, we returned three hundred and eighty eight dollars million of cash to our shareholders through two hundred and forty eight million dollars of share repurchases in the payment of one hundred and forty million dollars in dividends. We have one point three dollars billion remaining on our share repurchase authorization, and we continue to expect diluted weighted shares outstanding in the range of one hundred and sixty one to one hundred and sixty three million. Let me now turn to our outlook for the balance of fiscal 2021. As we've seen over the past several months, the trajectory of the cold virus can change quickly, as evidenced by recent increases in case numbers in many parts of North America and Europe. On our Q4 Flight 20 in Q1 earnings calls, we outlined two assumptions that underlie our guidance for fiscal twenty twenty one that we are reiterating today. First, we do not assume a new wave of covid-19 which would lead to shelter at home and economic lockdown's, which would preclude patient mobility and consumption of health care services. And second, we do not assume any systemic customer insolvency events. We continue to believe that the recovery will take longer than initially anticipated and it will not be linear. As the full impact of the pandemic is likely to persist beyond the fiscal year. The non-linear nature of the recovery continues in our second quarter as a result of our second quarter performance and outlook for the remainder of the year, including near-term opportunities related to covid-19 demand. We're increasing our adjusted earnings guidance range to sixteen dollars to sixteen dollars and fifty cents from our previous range of fourteen dollars and seventy cents to fifteen dollars and fifty cents. While our games does not take into account any revenues or earnings related to future covid-19 vaccine distribution, it does include volumes from our marketing program and our medical surgical segment, which I'll provide more details on shortly. We anticipate consolidated revenues to increase two to four percent for fiscal 20 21. We now expect a consolidated, adjusted operating profit will grow two to six percent for the full year when excluding the results of change health care from the prior year, an increase from our prior guidance of a decline between one and four percent. We continue to anticipate enterprise adjusted operating profit to grow sequentially throughout fiscal 2021. And now on to the segments in our U.S. pharmaceutical segment. We expect revenue growth of three to six percent and samant adjusted operating profit to grow one to four percent compared to the prior year. This takes into account improved volumes, particularly in our specialty businesses. In our international segment, we expect a revenue decline of five to 10 percent year over year in segment adjusted operating profit to be flat to four percent growth, driven by the performance in our European business. Let me now provide some details on her medical surgical segment, as discussed in my opening remarks throughout the quarter, we saw increasing volumes of covid-19 tests. We expect these sales to be a near-term opportunity in the segment, and it's factored into our guidance for the remainder of fiscal 2021. We've also seen increased volumes of personal protective equipment. This category remains vital as we support our customers. During the pandemic, we expected volumes will continue to fluctuate through the balance of the year. As the largest seasonal flu vaccine distributor in the U.S., we continue to prepare for the influenza season, which is particularly important this year. The impacts of covid-19 on the nation's health care system. While it's too early to predict how the flu season will progress. We're actively preparing to meet the needs of our customers. As Brian mentioned in his remarks, we're also partnering with HHS on preparing and storing ancillary kits to be used in the administration of a future covid-19 vaccine. We've included in our guidance a net benefit to adjusted earnings per diluted share of approximately 15 to 20 cents in the second half of our fiscal year related to our partnership with HHS. As a result, we now expect fiscal twenty twenty one medical surgical segment revenue to increase between 20 and 25 percent in segment adjusted operating profit to grow in the range of eight to 18 percent. And our Prescription Technology Solutions segment, we expect segment revenue to grow five to 10 percent in segment adjusted operating profit in the range of down five percent to flat. We expect improvement in this segment over the second half of the fiscal year as we continue to realize the benefits of our strategic investments. This is our first quarter report on Prescription Technology Solutions segment and want to provide some background on the drivers within the segment. Brian discussed in his remarks how this segment brings together a really health pharmacy cover my meds in our Crossroads businesses volumes in a really healthy cover. My meds businesses are driven by pharmaceutical transactions, including prior authorizations. Finds in these businesses are also driven by adding drug branch, the existing platforms and services that we offer to our biopharma and pharmacy partners. Moving on to corporate, we now expect corporate expenses in the range of 625 to six hundred and seventy five dollars million. Our corporate guidance takes into account increased technology investments and the impact of our second quarter equity investment gains in McKesson Ventures portfolio, as previously discussed. Let me wrap up our outlook by turning to cash flow. We continue to expect free cash flow of approximately two point three to two point seven dollars billion. As a reminder, we historically have generated the majority of our cash in the fourth quarter of our fiscal year. This consistent cash flow generation provides the financial flexibility to continue investing in our strategic initiatives, which position our business for the long term growth. Our investment grade credit rating remains a priority and underpins our financial flexibility. We have two bonds totaling approximately one billion dollars, which mature during the second half of our fiscal year. We intend to utilize a portion of our free cash flow to modestly deliver by up to 500 billion dollars, further strengthening our balance sheet and financial position. And we remain committed to returning capital to shareholders, to a modest dividend and through share buybacks. In closing, we're pleased with the results of our fiscal second quarter and we're confident in our uptimes outlook for the remainder of the fiscal year. Our focus and execution should drive another full year of operating profit growth despite a challenging and competitive environment. We will continue to invest in high growth, high margin markets and strategic areas that will further leverage our differentiated positions in oncology and biopharma services. We're proud of our expanding partnerships as we work on the covid-19 vaccine effort and continue to be an important part in the pandemic response to maintain Supply-Chain stability. And with that, Holly, let me turn the call back to you for Q&A. Holly Weiss: Thank you. We will now take questions in the interest of time. Please limit yourself to just one question to allow others an opportunity to participate. Operator. Brian Tyler: Operator, can we go to questions, please? Operator: Thank you, if you would like to signal a question, please, press star one on your touchtone telephone. If you are joining us today using a speakerphone, please make sure the mute function is turned off to allow your signal to reach our equipment again. That is star one, if you would like to ask a question. Our first question will come from our are from nephron research. Your line is open. Eric Percher: Thank you. Your enabling the vaccination distribution is of great interest. Brian, could you help us understand what's required? Operationally, it sounds like you're developing some new disease as well as using some of the existing infrastructure. And then, Brett, can you help us understand the financial flows from a government contract of this type to some of the initial government investment flow through the port? And should we think of this as paid for preparation, or is it really tied to the amount of volume that ultimately moves through? Brian Tyler: Well, good morning, Eric, thank you for the question. You know, we're fortunate to have had the H1N1 experience about a decade ago and provided a bit of a roadmap or a playbook for us to execute. I mean, based on the volumes that we've been given and projections, we have quickly been engaged in standing up some new facilities, both for the vaccine distribution and for the kitting and and frankly, for just some storage that is all in flight on plan tracking. But, yes, it will be it's a big effort to send up several new facilities and on board a lot of new employees, but something that we've successfully done in the past. Britt Vitalone: Eric, let me address your second question. There's a couple different elements to this program. As we've talked about previously, we were reimbursed for some of the cost to set up these new facilities. We will also when a vaccine is approved and we begin distribution, will recognize a fair value for the services that we perform, a similar to a third party logistics provider that's on the vaccine side. Obviously, that hasn't started yet as the fact there's not been a vaccine that's been approved. On the kidding side, it would be very similar to how we prepare kits that we did in H1N1. As we prepare kits and produce, those kids will recognize revenue as those kids are prepared and produced. Holly Weiss: Next question, operator. Operator: And next will be Robert Jones from Goldman Sachs, your line is now open. Robert Jones: Great, thanks for the question. I guess maybe just to stick with covid, but looking at the medicine segment, you know, it would appear that even in the quarter, you know, came in somewhere roughly around 50 million higher than what was implied relative to the back half guidance you guys had given previously. Just wanted to see if you could share or help us understand kind of what drove the performance as it relates to the increase in covid-19 test. That you mentioned and then the increased demand for Egypt, just trying to really get some context around just what the contribution has looked like in that segment from to test and people would be helpful. Brian Tyler: Sure, thanks for the question. I'll start certainly as the year has progressed, we've seen some momentum in that in the segment. What we talked about in both of our comments and what we've seen through the through our second quarter is that covid-19 tests in personal protective equipment have increased in volume throughout the quarter. So there are a key driver for that. We also I also touched on early vaccine flu vaccine sales. So too early to call the flu season, but we did see earlier of flu vaccine sales and we had anticipated a little bit stronger than we had anticipated in the quarter. And we're seeing really strong underlying performance as flu vaccine sales start to pick up, as covid-19 test kits pick up. That really helps the core business. It drives more primary care visits. It drives more supplies within our core business. So I think all of those things really play together. But certainly covid-19 tests and personal protective equipment are key drivers in the quarter and key drivers for our full year raise. Holly Weiss: Next question, operator. Operator: And next will be Stephen Baxter from what research? Sir, your line is now open. Stephen Baxter: Hi, thanks, one of the ask about the trajectory and seasonality of the prescription technology business, it seems like the full year guidance implies a pretty big step up in we relative to what you just posted for Q2. So I was hoping you could talk a little bit about the factors driving this increase, whether there's anything to do with some of the timing of investments, spend, you say release. And then just in general, what's the right way to think about seasonality in this business? Trying to understand we should be thinking about future periods, you know, using the second half of fiscal 20, 21 as a baseline or his other considerations that we should be keeping in mind. Thanks. Britt Vitalone: Appreciate that question, I'll start and then Brian can certainly elaborate, we have been making investments into this business. We think that this is a business where innovation can happen. And so we've been increasing our investments over the last year or so and we'll continue to do that. Certainly, one of the things that we've noticed here is that lower prescription volume trends versus the prior year, particularly new prescriptions or new brand prescriptions, has had an impact on that business. From a top line perspective, we do expect that the second half of the year we'll see some very strong growth in typically in this business. You can expect that the fourth quarter is a little bit stronger seasonally than the other three quarters. So I think it's a few things. It's been the lower prescription volume trends year over year investments that we continue to make in the business to drive new brand programs and innovation. And then we expect that the back half of the year will be stronger and typically seasonally, Q4 is a little bit stronger than the other three quarters of the year and not much to add to that other than we do. Brian Tyler: Thank you. Know, as we bring these businesses together and look at the connectivity we have and the providers and pharmacies, we look at the automation experience and tools we have and the expertize in various disease states, we think this is a growing part of the market. And there, you know, we have opportunities to invest internally in innovation that will deliver superior returns over time and where we continue and are committed to making those investments. Holly Weiss: Next question. Operator: And next will be Kevin Caliendo from UBS. Your line is now open. Kevin Caliendo: Thanks and thanks for taking my call. Just a creepy question. You're saying demand is gone up, your inventory levels have gone up. I guess I'd like to understand the dynamics around the pricing of EPS and how that affects your revenues and or or profit. PPA prices seem to be stabilizing or maybe coming down a little bit. But and also we're hearing there's a shortage of nitrile gloves. Caden's talk a little bit about how pricing dynamics change your profit in the segment. Brian Tyler: Yeah, sure, I know there's been a couple of general comments, we certainly have seen higher demand for these products over the course of the year. That demand continued through the second quarter, more in the covid-19 test kits in the second quarter. But there's has been heavy demand as well. And look, we have very good and solid relationships from a logistics perspective with many different suppliers. We believe that that allows us to source competitively. And clearly the market is it's a competitive market on the sell side. But, you know, again, we've we've seen some stability in the pricing in the first half of the year. But it's a volatile market. There's a lot of demand is is changing as the year goes on. And, you know, our sourcing will adjust to that. And so what we're really trying to call out here is that we've seen a lot of demand in the first half of the year. It's been kind of volatile. And we would expect that we'll see good demand in the second half of the year, but certainly not in a straight line. But we feel that the relationships that we have with our suppliers put us in a good position to meet the customer demand. Holly Weiss: Next question Operator: And next will be Lisa Hill with JP Morgan. Your line is now open. Lisa Gill: Good morning and thanks for taking my question, Brian. Just going back to your comments around specialty and the on the ecology side, if they start to think about biosimilars coming to the market, especially in the oncology area. One, can you talk about if there were any benefit from biosimilars in the quarter? And then secondly, if you can help us to understand the margin differential and the opportunity around biosimilars as we think about, you know, the strength in your specialty about that. Britt Vitalone: Sure. Well, we you know, we've got a very strong provider base for specialty products. And that's our what we call sometimes our nonaffiliated or nonusers oncology and our U.S. oncology. The oncology business in particular, I think has been pretty resilient, probably visits even at the trough period or relatively stronger than many of the other specialties. And what we're seeing now is that combined, you know, the physical patient visits with telehealth activities, we're seeing volumes really get back almost to pre covid levels. And, you know, we have a tremendous footprint in that business. We have a broad set of scaled assets. And one of the things that where we think we will be able to do and are doing and will continue to expand over time is take advantage of not just biosimilars, but other new specialty products that launch into that space. So, you know, our conviction in the community provider settings and how what important role we think it plays in the health care landscape and we continue to invest and expand our offerings to position us to take advantage of those opportunities. Brian Tyler: And Lisa, maybe just to touch on your the last part we've seen that biosimilars have have grown this year. We've seen more biosimilars launch into the space, particularly into specialty provider and oncology. We think that biosimilars are a win win win. They're lower cost opportunities for patients. They provide economics for physicians, and they certainly provide better economics for us. So we like that biosimilars are continuing to develop. They're not very material yet, but they do continue to grow and certainly they provide better cost for the patient, the physician and better margin opportunity for McKesson. Holly Weiss: Next question. Operator: And next will be Jay Leno theme from Credit Suisse. Your line is now open. Unidentified Analyst: Hi. Thanks. I took a couple of clarification on the second half outlook. Medical surgical segment revenues, of course, if not include the benefit from vaccine distribution and second half. But can you give us any flavor around what is the second half outlook on mezzos business on apples to apples basis compared with nine percent growth you had in postop and same thing on international segment? What is driving that? I think the low double digit decline for second half outlook was down three percent in the first half. Brian Tyler: And thank you for the question and I'll respond to it. But just to clarify, the medical business really is not the vaccine distribution, but it's the marketing operation or the production of storage of the chips that will support the administration of the vaccine. Britt Vitalone: Great. Thanks, Brian. And so what we are seeing in our second half is a continuation of some of the momentum that we saw in the first half. We expect that covid-19 tests will continue to be a big portion of the business in the second half of the year. Our core business continues to have very strong momentum. And then, as Brian just clarified, we do I mean, we did put in guidance the killing portion of the contract that will drive some topline, as well as the 15 to 20 cents of adjusted earnings that that I called out. So what we what we have in our mid medical surgical business is a very broad based business that we've talked about many times across primary care, extended care. And we continue to to grow there. And the opportunities that we have now through our relationships with lab suppliers and others is just providing additional momentum in the business. Holly Weiss: Next question. Operator: And next will be Michael Seanie from Bank of America. Your line is open. Michael Cherny: Good morning and thanks for taking the question. I want to dove in a little bit on the other side and particularly thinking about how the pacing of growth this quarter could influence or impact the growth in the back half of the year. You noted some of the higher volumes from retail national accounts. This is despite what appears to be market wide softness and what you even call to in terms of the pace of recovery. So heading into the second half of the year, outside of specialty, which I know you already addressed. What are the key drivers to support us from a revenue growth in particular? And how should we think about how those should drop down to the bottom line and incremental margins? Britt Vitalone: Yeah, I'll start and certainly Bryan can elaborate, I think what we're seeing in our U.S. pharmaceutical business, just to be clear, it's our traditional US wholesale business to independents, to retail national accounts and the health systems. We're seeing pretty good stability in that business. Now we're seeing quarter to quarter stable position, stable growth. You add to that the position that we have in our specialty provider businesses, the opportunities that we're seeing in technology and what you're seeing as a business now that is growing at a stable, you know, two to four percent that we've seen over the last several quarters. So I don't think there's anything specific. I think it's just the good execution's stability of our customers in the stability of the environment that's really allowing us to continue to perform. Brian Tyler: I think that the brand market has been relatively stable, the generic market has been relatively stable, and we've been very focused on cost and efficiency initiatives in this business to help underpin that. Holly Weiss: Next question Operator: And next will be George Hill from the bank. Your line is now open. George Hill: Hey, good morning, Britain. Brian, thanks for taking the question. I was just wondering if you guys would quantify or detail both from an office procedure perspective and maybe from our volumes perspective, what percent of baseline you guys expect to achieve in the back half of the year as it relates to volumes? I know in the press release it says you're still not expecting kind of a return to baseline. But we'd love to know what percentage you guys are thinking of getting back to. Britt Vitalone: Yeah, great question and, you know, always a little bit risky to prognosticate in the current environment. I mean, even given the way we've seen the disease progressed in Europe and the U.S. in the last several weeks shows the volatility that's still out there in the marketplace. I mean, you'll recall we early in the year when we gave our first guidance, we assume Q1 was going to be the trough, that Q2 would get sequentially better, Q3 would get better. And by Q4, we would be back to what we call pre covid levels. If you think about the way the year unfolded, we had really high volatility in the first quarter, month to month, even week to week. The swings were were pretty challenging. I think we saw that begin to stabilize a little bit as we got, you know, midway through Q2. And the trend line started to look like they were they were leveling out a little bit. And so that that's what gives us the pause or or the revised view, I guess that that we won't get back to full covid, you know, elective procedures, physician office visits and scripts by by Q4. But the recovery is likely to extend and well into the calendar 2021. And so that's that's that's our current view. And that's what we've worked into our guidance. Next question. Operator: And next will be Steven Valiquette from Barclays, your line is open. Steven Valiquette: Great, thanks. Good morning, everybody. So you touched on this for the U.S. just a minute ago, but I guess I'm curious to hear about the IREX volume progression throughout the quarter for Europe, maybe any early color around trends in October as well. Just give us some of the reason in Europe seem to be going back into lockdown mode. Thanks. Brian Tyler: Yeah, we we we track these trends in Europe very closely, and frankly, what you see is it's really not a Europe trend. It's a country by country trend, depending on how the the the the covid virus itself progresses and how local governments react to react with their social policy closed down, locked down and things of that nature. So it really is very different. We saw, you know, France, for example, tended to be ahead of the UK in the way it experienced these waves. But the general theme has been pretty consistent that we had the trough in the Q1 period. We had slow strengthening. We're very proud of the way our teams of have operated. There are pharmacies are open. They're servicing their communities. They've adopted all the new safety protocols and standards to enable them to provide that continuity of care. But I'd say at a macro level, I mean, while there is definitely a difference between countries in the way the way country governments react, it's generally the same. Holly Weiss: Next question. Operator: And next will be Ricky Goldwasser from Morgan Stole from Morgan Stanley, your line is open. Ricky Goldwasser: Yeah. Hi, good morning. A quick follow up question on the covid vaccine benefit. If we think qualitatively about the relative contribution from kitting versus vaccine, how should we think about these two? Is vaccine contributions in general qualitatively tend to be higher than the kidding or vice versa? I think the broader potential opportunity. Brian Tyler: Yeah, yeah. Thanks for the question. You know, look, we've only quantified our relationship on the kitting side. That's really all that we can quantify at this point. We don't have a vaccine approved, so it's too early for us to really provide you any guidance on that. And I wouldn't try to relate that to their very different programs. I would say, though, that the marketing program does provide us the opportunity to continue to expand our relationship with the government and others. We certainly have all the capabilities and that's why we were selected to be able to continue to expand our capabilities and services. So we're we're focused right now on the programs that are in flight. But certainly there are opportunities for us beyond that. Holly Weiss: Next question. Operator: And next will be Glen Santangelo from Guggenheim Investment. Your line is open. Glen Santangelo: Oh, yeah. Thanks for taking my questions, Brian. I just want to follow up and maybe pivot towards the opioid litigation status. It's been a while since we heard anything on this front. You know, in the press release, you seem to suggest that you're going to reserve some money for settling with the state of New York, potentially just kind of curious. I mean, you know, has be really slow the process here. It felt like we were making much greater progress in the beginning of the year. Tracking toward the settlement now feels like, you know, there's some inertia in the process. And I was just kind of curious if you could maybe give us an update on any signposts that we should look out from this point. Britt Vitalone: Again, just before Brian jumps in there, I just want to clear up the New York charge that we took was related to the surcharge that was enacted in 2017 and 2018. So what we're doing here is just picking up the accrual for the reversal of of that court litigation suit back in 2019. So it's not related to the larger opioid settlement at all. Brian Tyler: Yeah, great. Great. I was going to make that point. So, I mean, and as regards to the larger discussions, I mean, I think it's fair to say there was a few months period there where the nations and the AGs and the distributors focus was on responding to a pandemic. But, you know, we're now in a month of this. And just like all of us have had to find ways to return to normal business, we continue to be engaged with the AGs. We continue to believe we're making progress in the discussions, that we continue to be hopeful we'll reach a broad resolution because we think that that's the best way to accelerate relief for people and communities that have been impacted, you know, by various health crises at this point. So we remain very focused and hopeful. Holly Weiss: Operator, we have time for one more question. Operator: Certainly, and that question will come from Elizabeth Anderson from Evercore. Your line is open. Elizabeth Anderson: Hi, guys. Thanks for the question. I was wondering if you could provide a little bit more in terms of details on and just in terms of like how you see the trajectory of that problem, the types of drugs and potential and potentially also how you guys positive value proposition to to customers and sort of if you could comment on margins, that that would be helpful. Thanks. Brian Tyler: So, I mean, relative to HAMP, I mean, I really think about this. As you know, there are existing models out there to do access and adherence. But really, frankly, you know, hasn't haven't really innovated too much in in a long time. And the opportunity we see here is to bring really the disease state expertize the expertize we have over two decades supporting these access adherence like programs, but then leveraging the technologies that we have in a relay or a cover my meds to essentially automate and make that process more efficient, get patients started on their therapies quicker, help them adhere to them longer so that ultimately they get better health outcomes. And so, you know, it's really the combination of these things that's kind of redesigning the access and adherence model. And we've been very pleased with our early partnerships and the development of this. We've been very quick to take it from concept into market, and it's been quite encouraging and nice to see the number of brands on that program grow and the pipeline continue to expand. OK, well, I'd like to apologize for running a few minutes late. We wanted to be provide as much insight as we could on the call. I want to thank everybody for your great questions and thank rule for helping facilitate this call. I'm going to conclude my remarks today by once again thanking all of the frontline workers across the world who are working day in and day out to keep us healthy and keep us safe. And I want to recognize the great work of the McKesson team, all 80000 of them, for their persistence, for their commitment, for their energy and resiliency. During this time, they really are playing a vital part in keeping our communities healthy as well. So I wish you all a very good day. I hope you voted if you haven't. Please do. And with that, we'll talk to you next quarter. Operator: Thank you for joining today's conference call, you may now disconnect and have a great day.MCK Ratings Summary
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McKesson Slips on Q3 Miss but Lifts Full-Year Outlook
McKesson (NYSE:MCK) saw its shares decline nearly 2% in pre-market today after posting third-quarter earnings and revenue that fell short of analyst expectations. Despite the miss, the pharmaceutical distributor raised its full-year earnings guidance, signaling confidence in its long-term momentum.
For the quarter, McKesson reported adjusted earnings per share of $8.03, below the analyst forecast of $8.27. Revenue climbed 18% year-over-year to $95.29 billion but came in slightly under the expected $95.77 billion.
While the weaker-than-expected results weighed on investor sentiment, the company revised its fiscal 2025 guidance upward, tightening its adjusted EPS forecast to a range of $32.55 to $32.95 from its prior estimate of $32.40 to $33.00. The new midpoint of $32.75 now slightly exceeds Wall Street’s consensus of $32.67.
McKesson’s U.S. Pharmaceutical segment, its largest revenue driver, delivered a 19% increase to $87.1 billion, fueled by rising prescription volumes and expansion within its oncology platform.
Additionally, the company announced a strategic move to bolster its presence in vision care, securing an 80% controlling stake in PRISM Vision Holdings, LLC, a provider of ophthalmology and retina management services.
Although the earnings miss triggered a pullback in shares, McKesson’s continued revenue growth and strategic expansion suggest underlying strength as it looks ahead to 2025.
McKesson Slips on Q3 Miss but Lifts Full-Year Outlook
McKesson (NYSE:MCK) saw its shares decline nearly 2% in pre-market today after posting third-quarter earnings and revenue that fell short of analyst expectations. Despite the miss, the pharmaceutical distributor raised its full-year earnings guidance, signaling confidence in its long-term momentum.
For the quarter, McKesson reported adjusted earnings per share of $8.03, below the analyst forecast of $8.27. Revenue climbed 18% year-over-year to $95.29 billion but came in slightly under the expected $95.77 billion.
While the weaker-than-expected results weighed on investor sentiment, the company revised its fiscal 2025 guidance upward, tightening its adjusted EPS forecast to a range of $32.55 to $32.95 from its prior estimate of $32.40 to $33.00. The new midpoint of $32.75 now slightly exceeds Wall Street’s consensus of $32.67.
McKesson’s U.S. Pharmaceutical segment, its largest revenue driver, delivered a 19% increase to $87.1 billion, fueled by rising prescription volumes and expansion within its oncology platform.
Additionally, the company announced a strategic move to bolster its presence in vision care, securing an 80% controlling stake in PRISM Vision Holdings, LLC, a provider of ophthalmology and retina management services.
Although the earnings miss triggered a pullback in shares, McKesson’s continued revenue growth and strategic expansion suggest underlying strength as it looks ahead to 2025.
McKesson’s Upcoming Q4 Earnings Preview
Deutsche Bank analysts provided their outlook on McKesson Corporation (NYSE:MCK) ahead of the company’s upcoming Q4/23 earnings release, scheduled on May 8.
The company should provide initial 2024 guidance. The current Street estimates stand at $26.22 for 2024 EPS, which represents very modest low-single-digit EPS growth compared with the company’s 2023 EPS guidance range of $25.75-$26.15.
While this growth would be below the company’s long-term EPS growth target in the range of 12%-14% EPS growth, the company has several large contributors to EPS in 2023 that when backed out, sets a lower core starting base for 2024 guide to be within long-term growth trend.
The analysts reiterated their Buy rating and $430 price target on the stock.
McKesson’s Upcoming Q4 Earnings Preview
Deutsche Bank analysts provided their outlook on McKesson Corporation (NYSE:MCK) ahead of the company’s upcoming Q4/23 earnings release, scheduled on May 8.
The company should provide initial 2024 guidance. The current Street estimates stand at $26.22 for 2024 EPS, which represents very modest low-single-digit EPS growth compared with the company’s 2023 EPS guidance range of $25.75-$26.15.
While this growth would be below the company’s long-term EPS growth target in the range of 12%-14% EPS growth, the company has several large contributors to EPS in 2023 that when backed out, sets a lower core starting base for 2024 guide to be within long-term growth trend.
The analysts reiterated their Buy rating and $430 price target on the stock.
